6/18/14

Most people view taxes as unavoidable... They're inevitable, like death, right?

That thinking leads many people to ignore the huge benefits gained from investing through tax-sheltered accounts. But in an effort to protect us from its own taxes, the government graciously allows individuals to invest through several tax-deferred accounts.

The main examples are an individual retirement account ("IRA") and a 401(k). In the next two essays, I'll explain how these accounts work... and how they can provide you with instant returns that will compound your wealth for many years to come.

Today, I'll cover the huge benefits offered by opening an IRA.

An IRA lets you park your cash and compound your wealth tax-free.

You don't have to pay taxes on capital gains, dividends, or interest income for any stocks, bonds, or funds you hold within an IRA. (If nothing else, this makes for simple accounting come tax time.) Even better, you make contributions to a traditional IRA withpre-tax dollars (up to a certain level of income).

For instance, say you make $100,000. With a marginal tax rate of 25%, you would owe roughly $16,857 a year in taxes (depending on a lot of other assumptions). So you'll take home $83,143. If both you and your spouse make the maximum annual IRA contributions of $5,500, you'll adjust your taxable income to $89,000. Your tax bill will drop to $14,107. You end up taking home $74,892... but you also set aside $11,000.

Another way to look at it:

You get $11,000, but it only cost you $8,250. That's an immediate 33% return on your investment, which you then compound for decades.

The only downside is that you can't withdraw your money until you reach 59-and-a-half years of age. If you do withdraw before then, you have to pay the taxes due on it plus a 10% penalty.

After 59 and a half, your withdrawals are taxed as ordinary income. If you withdraw $50,000 a year, that will count toward your annual income. You'll be taxed accordingly. And when you reach 70 and a half, you must start making the minimum required withdrawals.

In short, if you don't have an IRA now... open one immediately!

Opening an IRA is as easy as opening any other brokerage account. You can do it with any brokerage. When registering, you simply select an IRA as the account type.

When you file your taxes at the end of the year, the forms include a line to enter any IRA contributions. It's as simple as that. And it will save you tens of thousands of dollars over just a decade or two of retirement savings.

There's another type of IRA called a "Roth IRA" These accounts let you make after-tax contributions. Then when you withdraw the income in retirement, you don't pay any taxes on them.

This account makes sense for people who believe that their tax rate is lower now than it will be when they retire. That's the case for some, but not for most. There are also income limits to Roth IRAs. If you make more than $129,000 as a single person or $191,000 as a married couple, you can't contribute to a Roth.

But as I mentioned, there's also another tax-deferred account that you probably have access to – a 401(k).

4/23/14

Stock splits shouldn't mean anything, all you are doing is slicing the pie into more pieces, it is still the same pie BUT more times than not, the investing public (which thinks a lower price is a bargain) will buy shares prompting the stock to rise.

We haven't seen too many stock splits lately which is reminiscent of the tech boom/bust in the early 2000's.

4/8/14

The investerati has convinced the public that if you save a few extra dollars or come into some money, that you need to 'invest' it in the stock market. This is simply not true, there is nothing wrong with a nice safe CD or money market at your local bank.Having said that, if you have decided to invest, do yourself a favor and invest on your own and save a fortune and I mean a fortune, thirty years of giving up just 1% will cost you half your money, that's right half!The investment community are masters of marketing and have you convinced that you cannot invest on your own BUT you can and it's easy.Here's the scoop.

91% of money managers cannot beat the S&P 500

Neither can your stockbroker who charges commissions

Neither can your financial advisor who charges fees

How do I know? I was a great salesman and convinced alot of people to take on more risk in stocks and got paid well for doing it. The dirty little secret is that you can do the same thing yourself and save alot of money, hundreds of thousands over a lifetime!Most stockbrokers or financial advisors are genuinely good guys interested in your accounts well-being. The problem is that your financial guy (and the brokerage firm he works for) get paid either by assets under their control or money in motion and charge you either commissions or fees which simply eat into your returns, IT IS THAT SIMPLE. Value added, are you kidding? How did you do over the last year compared to the S&P 500?So instead of being one of the 91%, try to become one of the 9%.

3/25/14

You hear about this great mutual fund and you jump in. In the first year it returns 100%, nice, very nice. The second year isn't so good, down 50%. The mutual fund then claims an average return of 25% which is technically true if you just do the math and average the two years.However, if you were a shareholder for both of those years, your return is 0%. Whatever you gained in the first year was wiped out in the second. Its called CAGR which is compound annual growth rate which is the 'real' or annualized return. As an investor, you need to be wary of many things, only one of which is the 'return' a mutual fund or your stockbroker claims to have achieved.Since 1990, the stock market (as judged by the S&P 500) returned 11.18% but a CAGR of 9.46%. That is a massive difference and is one of the many reasons you never seem to do as well as your financial guy says :)

3/7/14

The US bull market is now 5 years old. That is a long time. Probably few investors remember how terrible the markets where just five years ago. There were people calling for the end of capitalism! The old saying goes "buy when everyone else is fearful" couldn't be more true than it was March 9, 2009.

The current bull market may not be the longest in history but it is getting close. You never know what will derail it, sometimes it is valuation, sometimes it is geopolitical and sometimes it takes just one small event to trigger selling. I know this, with more hedge funds holding more assets, when real selling occurs, it will be swift. You need to decide now what you might do.

My favorite of all wall street sayings is "professionals sell on the way up and amateurs wait for trouble and sell on the way down". The psychology behind this is true. I don't know when the bull market will end but check out the chart below and remember the terrible bear markets that took place after each!

If you utilize a financial guy, make sure you compare your brokerage account to history and if you didn't annualize over 19% a year over the last five years, then you are paying for nothing.

Don't expect your financial guy to sell anything now either for two reasons;

financial advisors only get paid for assets on the books, not cash

it's easier to be one of the crowd and ask for forgiveness when your account withers rather than risk being right

2/27/14

This is a question from the radio the other day. Sometimes I think the longer you stay in a business the further removed you become from those that aren't in your business. I can't understand my plumber, never mind my doctor so when I heard this question 'what do interest rates have to do with stocks', I realized I was probably doing the same thing so I digress.

Interest rates are set by a countries central bank, here in the US, that is the Federal Reserve. They set the Fed funds rate which is basically the rate at which banks can borrow money. Banks in turn, lend that money out after they mark it up for a profit. Simple.

When times are good and getting better, the Fed raises interest rates to slow inflation.

When times are bad and getting worse, the Fed lowers interest rates to spur the economy.

The relation of interest rates to the stock market is not simple, it is very complex to say the least. When interest rates on fixed income such as CD's, US Treasuries and corporate bonds are relatively high, investors tend to take on less risk which can put pressure on stocks however, increasing interest usually means times are getting better which means public companies profits are stronger and thus their stock price should reflect those profits and increased cash flow. But corporations borrow money too and increased borrowing costs will affect companies profits and thus their stock price.

As you can see, the relation of interest rates to the stock market is very complex to say the least. Hopefully this very brief overview has been helpful.

2/7/14

"Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

-- Warren Buffett, 2010 Berkshire Hathaway Annual Report The preceding from Warren Buffett is undeniably true. Interestingly, the amount loaned by brokerages to clients to buy more stocks is at an all time high except three weeks before the financial meltdown in 2008.It's always a great idea to be careful and borrowing money to buy stocks is a terrible idea.

1/23/14

Check out this article from Marketwatch here which details just some of the Wall Street Brokerage firms 'take' last quarter. Without boring you with the exact figures and all the details, the bottom line is that in just three months, these firms made several billion dollars. Do the clients of these firms know what they are paying in commissions? Do they know what they are paying in fees (and yes, 1% over time is a HUGE NUMBER)? My guess is NO, they do not know what they are paying and that they are the source of revenue, income and profits.

There is absolutely nothing wrong with making a profit when you provide some kind of service or value. I know when I buy a suit that there is built in profit but I can't make my own suits. I know when I buy a car that there is a huge profit in it for alot of people. I know when I go see the doctor that he (and others) make a tidy sum off me but that's ok because I cannot diagnose an illness. The same is not true with Wall Street and your retail financial guy. He provides little if any value and takes a massive fee for doing so. Did you know that over 90% of stockbrokers, financial advisors, mutual fund managers, etc cannot beat the simple S&P500 index? It's true.

Stop being a stooge. Don't become next quarters Wall Street profits. Investing is alot easier than the investerati would have you believe. Invest by yourself and for yourself, save a fortune and put your money in the hands of the person who cares about it most - YOU!

1/14/14

Wow, alot of great things happening at Money, Finance and Investing. So many projects, so little time. We have decided to go the route of blogspot which we use for How The Investment Business REALLY Works as well, largely because we are finance guys, not technical guys and this setup is easy, it loads well and looks great on mobile too!

Thanks for sticking with us. We expect to deliver THE best in free unbiased content and I'm sure you will agree. Remember that most websites and blogs are owned by some financial guy trying to get you to buy some financial product through them, not here. Sure, we offer some MP3's, eBooks and few other goodies but we aren't selling stocks, financial advice or insurance.

We have a LinkedIn page which would be a great forum for discussions, so make sure to check LinkedIn here and you can follow Scott Barclay on Twitter here. You can follow and make comments at Facebook here.

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